By Lisa Uhlman
Plus-size women's clothing retailer United Retail Group Inc. is set to sell itself after a New York bankruptcy judge approved sale procedures Wednesday, following a contentious hearing over whether the proposed sale unfairly benefits would-be buyer Versa Capital Management LLC.
Attorneys for the debtor, Versa and the official committee of unsecured creditors painstakingly hashed out dates for an auction and a sale hearing before U.S. Bankruptcy Judge Stuart M. Bernstein, although Versa expressed concern that its stalking horse bid was not adequately protected due to the creditors committee's refusal to acquiesce to certain terms. The committee, meanwhile, unsuccessfully fought a proposed $1.2 million breakup fee for the stalking horse.
The bidding and sale procedures issue was the sole substantively contested issue at Wednesday's hearing, which saw Judge Bernstein sign off on a number of matters, including United Retail's motion to approve its $40 million debtor-in-possession financing agreement with Wells Fargo Bank NA, as well as motions to approve contracts with critical vendors and utilities providers.
"And now for the main event," Nicole Greenblatt of Kirkland & Ellis LLP, an attorney for the debtor, announced to the full courtroom as the agenda transitioned to its only controversial item, the bidding and sale procedures.
She was followed by her colleague Marc Kieselstein, who noted that while, thanks to significant work by both sides in the past few days, there were more issues of agreement than disagreement between them, the remaining issues of disagreement were significant.
He said the first of the remaining hurdles was the question of timing for adjudicating the stalking horse's right to credit bid a $9.5 million claim it purchased from United Retail parent Redcats USA Inc., arguing Versa wants a hearing before the auction on whether the credit bid will definitely be allowed but that the committee has refused to agree to one.
"We're not in an ideal world; we're in bankruptcy, which is about as far from ideal as you can get," Kieselstein said. "We want the issue teed up so it can be adjudicated in a coherent way. All we really ask is that your honor set down a reasonable schedule."
But Jay Indyke of Cooley LLP, proposed counsel for the creditors committee, said the issue was not as simple as that, arguing that because of a no-shop blackout period in this case, his clients wanted more time to solicit more offers from potential bidders who so far had not been able to sign nondisclosure agreements.
"The issue is, with this blackout period, timing is an issue," Indyke said. "If Warren Buffett walks in and says, 'But for this blackout period, we could really come in with this great deal, so we need an extension of time,' ... we want to ask for an extension of that period."
He also rebutted Kieselstein's argument that there should be a cap on how much the committee can spend investigating the fairness of Versa's bid, saying that since it's likely that the credit bid will chill other bidding, it's very reasonable that the committee would want to look into its propriety.
The creditors committee therefore reserved its right to object to the credit bid in the future.
"This is an insider claim [and] we're reserving our right to object; there should be no prohibitions on that," Kieselstein said.
Finding that it seemed like the parties, despite their respective misgivings, seemed to have resolved the issue, Judge Bernstein said the committee was entitled to object down the road.
"Right now, they have no evidence that the $9.5 million is avoidable," the judge said. "It doesn't sound like they're going to have it by the time of the auction, and if they do, they're going to have to file an adversary proceeding."
The final issue the parties debated was the proposed $1.2 million breakup fee, with the creditors committee arguing it represented too high a percentage of the stalking horse's bid.
But Judge Bernstein wasn't swayed by that argument, finding the committee was wrongly characterizing $20 million that Redcats is including in the deal as not constituting part of the bid, which is actually a $40 million package, putting the breakup fee at a reasonable 3 percent.
With the blackout period now over, the auction is set to take place March 23, with a final sale hearing scheduled for April 3.
United Retail, which sells women's clothing under the Avenue brand, filed for bankruptcy protection Feb. 1, citing too-expensive rent at retail locations and saying Versa would serve as lead bidder for its assets.
The business has been plagued with retail sales declines since the company's $200 million acquisition in 2007 by Redcats, according to court filings.
The debtor is represented by Nicole Greenblatt, Paul Basta, Marc Kieselstein and Benjamin Steele of Kirkland & Ellis LLP.
The creditors committee is represented by Jay Indyke of Cooley LLP.
Versa Capital is represented by Alexandra D. Korry and other attorneys from Sullivan & Cromwell LLP.
The bankruptcy is In re: United Retail, case number 1:12-bk-10405, in the U.S. Bankruptcy Court for the Southern District of New York.
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